'Why did they take the money?" People in my local pub in London's Clerkenwell usually don't pay attention to academic news, but the day after Howard Davies resigned from the London School of Economics for taking Libyan money, my booze-mates wanted to know. (Since I retired from the LSE, the saloon bar has served me as a lecture theatre.) They asked the right question; the story is all about cash, but cash in Britain.

Though there are many wealthy people in this country, they don't – with the exception of a few families such as the Sainsburys – tend to give large sums of money to universities. When I raised money for the LSE in the 1990s, rich British graduates were willing to write the odd cheque for a thousand pounds or so, but didn't feel responsible for keeping universities going; that was supposed to be the government's job. Yet since the Thatcher era, both Conservative and Labour governments have starved British universities of cash, opening up opportunities for dodgy donors. This is a problem we have made for ourselves.

Britain stands in stark contrast to America on the one hand and China on the other. For generations Americans have filled the coffers of their alma maters, whether private or public, elite or local. Not only the rich give; every graduating class has an agent whose duty is to beg and cajole, and pester all graduates annually. The wealthy who donate give staggering amounts in British terms; $20m is a reasonable endowment request, gifts of $100m or more have become the fundraiser's holy grail. Impossible here? If you owned a stately home, you could sell that Titian in the hall and donate the proceeds – but you likely wouldn't.

The Chinese currently do what the British government doesn't. They are funding new universities like mad; in 1993 they began a project to create 100 big new institutions entirely from scratch. Government officials often ask Chinese researchers to think big and spend more, rather than cut and trim. This isn't academic heaven, to be sure; the government dictates not just what to study, but how to study it.

In Britain, lacking the private and the public will to invest in education, our "solution" is to get foreigners to take care of us. Almost every British university is filled with foreign students who pay fees far beyond what British students pay; foreign postgraduate students in 2010 for the first time outnumbered UK students – by 132,000 to 131,000; the total income from all foreign students is estimated at about £5bn. For big projects or research labs, we also look abroad; by one estimate, Britain has taken £750m of such funding in the last decade. British education is going the way of British banking, becoming a local site for global operations.

The presence of international students in Britain is a huge social as well as economic plus; it's a good thing for young people to live with people who come from different places. The role of foreign donors, with few roots in this country and agendas of their own, is problematic. The failure to take care of ourselves issues a particular invitation to the dodgy donor who exploits the prestige of British academic institutions for ends that have nothing to do with education. And "dodgy" does not mean just dictators; private companies – local as well as international, but in the last decade more likely to be internationalfirms that are seeking out prestigious universities – too often commission "applied research" that has no inherent academic value.

Perhaps perversely, in the last few days I have wished that the LSE's problems were unique, because then they could be more easily solved. This is basically a fine school; new brooms will be able to sweep it clean. I think our director did the honourable thing in resigning. However, Davies didn't create the problem of the dodgy donor – he succumbed to a structural danger that is built into the educational system. And that danger looks to become only worse.

On the one hand, the foreign "solution" to Britain's funding of education is in a mess because the government wants to cut the numbers of non-EU students allowed into Britain – so less cash. This weekend 16 vice-chancellors published a letter in the Observer expressing their "profound concern" at the proposal of the home secretary, Theresa May, to slash student visas.

On the other hand, the government is drastically cutting the money it gives to education, and no stately home owners are stepping up to the plate to sell Titians for the sake of the nation. So more need of foreign cash.

The people in my pub, I'm sorry to say, have also taken against foreigners. (American immigrants like me don't seem to count.) Isolation seems to them a remedy for vulnerability. Mixed together, this is a lethal cocktail. My neighbours have no money to give, the stately home owners are unlikely to change their hoarding habits, so the only antidote lies in Whitehall. What do you think are the chances of them thinking straight?